As China's economy cools, a focus on the longer term

By
Jeffrey S. Wang

November 1, 2012

China’s economy is creating headlines nearly every day. Markets are saturated with analyses of China’s slowing economy, the country’s complicated political environment, or just about any other aspect of Chinese economic life. Indeed, the constant media coverage is understandable, considering China’s enormous contribution to global economic output.

In light of this never-ending scrutiny, we believe investors would be wise to take a step back and put China’s recent slowdown in perspective. The most bearish of forecasters are estimating that Chinese economic growth could slow to an annual rate of somewhere around 4% (source: International Monetary Fund). Does this level of growth indicate a permanently disabled economic system? While we acknowledge that China’s economy is imperfect in several respects, we believe the answer to this question is no. We’d argue that growth in the 4% range could realistically be viewed as a noble pace, particularly in light of the persistent problems that are hampering growth in many parts of the world. Furthermore, we note that government officials, in our view, are highly likely to use stimulus measures to prevent a full-fledged economic freefall.

Another bit of perspective is provided by looking back in time: China's economy has been growing at 9 - 10% for 20 years or so, and it’s hard to fathom an economic engine that could sustain such growth forever. In fact, we believe that a period of economic cooling could possibly result in a better — more stable, more balanced — long-term economic picture.

Ultimately, we are strong believers in China’s potential, and we believe that favorable investment opportunities will continue to appear within the country’s borders.

As many analysts have pointed out, billions of people are joining China’s burgeoning middle class, and the long-held image of China as the world’s manufacturer is giving way to a new reality in which China’s consumer class takes a bigger share of the limelight. This is a dynamic that is firmly in place, and we will therefore look to domestic consumption as a driver of business activity. With that focus in mind, companies that serve China’s consumer-driven economy will be among those that we seriously consider as we seek opportunities for investment.

According to many indicators, China’s economy is likely headed for a sustained period of relatively slow growth. Despite what could be a rocky period of adjustment, it’s worth keeping in mind that this downturn comes on the back of a dynamic and prolonged economic expansion, with the consumer segment playing a notable role. Appetites for luxury goods provide an indication of this growth.

Investing in China is not without its share of low-visibility areas. A general lack of transparency poses a persistent challenge, and many investors find this to be a significant source of discomfort. We therefore favor areas in which we see (1) secular growth, (2) assets that are difficult to replace (or unlikely to be rendered obsolete), and (3) enterprises that we believe are managed well. All along, we pursue companies that show high potential to perform consistently despite the ebb and flow of macro-level developments.

Following our long-standing practice, we invest with an ownership mindset. This means that we pursue a high degree of insight into each company’s operations, financial condition, and ultimate competitive advantage. We believe this nuts-and-bolts approach is important in any country we invest in, but even more so within the vast and contoured structure of Chinese markets.

Notwithstanding investors’ reaction to the stream of daily news, we remain disciplined in implementing our investment process — in China or in any other part of the world that we cover. We aim to continue investing in companies that we believe have strong franchise sustainability, long-term earnings power, and valuations that are at significant discounts to our estimates of their intrinsic value.

Tools and resources

Many investors have little experience investing in equity markets within emerging markets. At Delaware Investments, a seasoned team of investment professionals provides coverage of these markets, seeking to identify businesses with strong franchises and positive long-term growth prospects.

The team manages Delaware Emerging Markets Fund, a fund that seeks long-term capital appreciation by investing in equity securities issued by companies that are domiciled in — or that derive a significant portion of revenues from — developing nations.

The views expressed represent the Manager’s assessment of the market environment as of November 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s current views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and summary prospectuses, which may be obtained by visiting our fund literature page or calling 877 693-3546. Investors should read the prospectus and the summary prospectus carefully before investing.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Diversification may not protect against market risk.

Jeffrey S. Wang

Jeffrey S. Wang biography

Jeffrey S. Wang, CFA

Vice President, Senior Equity Analyst

Jeffrey S. Wang is responsible for covering Asia for the firm’s global Emerging Markets team. Prior to joining Delaware Investments in August 2007, he spent three years as an emerging markets investment manager at Pictet Asset Management in London, England, where he was part of a team that managed more than $10 billion in emerging market equity assets. In addition, he managed the firm’s Global High Yield Emerging Equities Fund. He began his career in 1999 at Putnam Investments, leaving the firm in 2002 as a senior investment associate. Wang earned a bachelor’s degree in economics, magna cum laude, from Harvard University and an MBA with High Honors from the University of Chicago Booth School of Business.

Any Macquarie Group entity noted on this page is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) and that entity's obligations do not represent deposits or other liabilities of Macquarie Bank Limited (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.

Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Fund's investment manager (DMC) and the Fund's distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. DMC, a series of Delaware Management Business Trust, is a U.S. registered investment advisor.

For financial professional use only. Not for use with the general public.